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COVER STORY: Making it in the city

Now more than ever, opportunity knocks in the inner city for both independent and chain food retailers.

April 30, 2002, 08:00 pm
By Jenny Summerour

It's a sunny Saturday afternoon, and a steady flow of customers saunter in and out of the local Safeway—a recently remodeled, 50,000-square-foot store with a bank, dry cleaning service, and Starbucks cafe. Among them are a Caucasian 50-something couple selecting fresh produce, steaks, and a fine wine to entertain weekend guests; an Asian college student picking up snacks and a six-pack of beer; and a Hispanic family doing their weekly shopping.

In a smaller independent grocery store called Tropical Foods, a few young African-American professionals select fresh vegetables and herbs for a new recipe they want to try, while an older couple from the Caribbean stock up on large bags of rice and other staples and happily discover several root vegetables from their homeland.

Both stores are operating successfully in what demographers are calling "gateway cities," densely populated urban areas—Washington, D.C. and Boston in these examples—where new immigrants are coming to live. Joining them are young professionals and even baby boomers who want to make new lives for themselves. Many of these areas are experiencing steady growth in density and development, and the opportunity exists for competitive food retailers—chains and independents alike—to gain footholds and penetrate a niche that the Wal-Marts of the nation might find difficult to service.

"Urban areas present a financial opportunity for retailers who want to find an underserved market," says Mark Blaxill, s.v.p. at the Boston Consulting Group. Blaxill and other analysts note that chain retailers that have entered the inner city say their urban locations invariably are their most highly trafficked and profitable stores. Yet while the huge gap between major grocery stores and dense urban areas has closed significantly in the last decade, new trends in urban development make the inner city an even more viable market, Blaxill notes.

Downtown is Back is the name of a study released last year by the Fannie Mae Foundation and Brookings Institution that found among a sample of 24 cities, 18 downtowns saw increases in their populations over a 10-year period. While suburbs continued to experience more growth compared to surrounding cities, most downtowns, defined as the city's central business district, were gaining a large share of metropolitan statistical area (MSA) population. "If people continue to move downtown, neighboring areas may experience spillover effects," the study suggests.

By operating in inner cities, retailers not only reach a denser population, they also cater to a much more diverse population that more closely mirrors the future demographic makeup of America. In the most recent Consumer Shopper Study released by the Boston-based Initiative for a Competitive Inner City, an analysis of U.S. Census data shows that the number of Latinos in the total U.S. population will grow to around 17 percent in 2020. The African-American U.S. population is anticipated to grow to 13 percent by 2020. In the inner cities, Latinos already comprise 31 percent of the population, and African-Americans 42 percent.

Even more interesting, while average household income is lower in inner cities than in many other communities, those households on average spend slightly more per month on food products than shoppers in the overall U.S., according to ICIC's findings.

So where are inner-city consumers buying their food? The ICIC study finds that grocery stores are by far the format of choice for meeting the food shopping needs of urban customers. For almost all grocery items surveyed, supermarkets had a 70 percent to 80 percent market share.

Despite a proliferation of drug stores, dollar stores, and other retailers that have added food to the mix, people still go to grocery stores, even small formats with limited offerings. Data from Trade Dimensions, the Wilton, Conn. retail database company, shows that 9 percent of the small grocery format, defined as having sales under $2 million annually, are in selected high-density areas. By comparison, conventional supermarkets do only 3.4 percent of their business in cities, and supercenters are almost nonexistent. Limited assortment and specialty food retailers such as Trader Joe's and Whole Foods operate 3.7 percent of their stores in urban settings.

A recent study conducted by the University of North Carolina's School of Public Health found a disproportionate number of mom-and-pop grocery stores and specialty food stores in poor neighborhoods. Researchers looked at 216 neighborhoods in Mississippi, North Carolina, Maryland, and Minnesota, using housing values to estimate economic standing. Wealthier neighborhoods had more than three times as many supermarkets as poor neighborhoods and there were four times as many supermarkets in white areas as in black areas.

This situation leaves a door open for independents to vie with chains in inner cities. "The independents, especially those that work side by side with a chain, can often fill a niche role, where a chain may be filling more of a basic role," says ICIC official Deirdre Coyle.

"There are real competitive advantages for doing business in inner cities. But it's not as simple as just putting in a store. A retailer should look at the inner city not in the standard footprint, but with a slightly different lens," advises Coyle. "And as with any store, you have to be responsive to your consumer base."

Unassailed in D.C.

Long a practitioner of urban retailing, No. 2 chain Safeway has maintained a strong presence in the nation's capital for 75 years. "We never abandoned the inner city," says Greg TenEyck, public affairs director at Safeway's Lanham, Md.-based Eastern division. "If you take a look at a map of Washington, D.C., we have stores in every quadrant, in every area of the city."

Safeway operates 16 stores within the District, has invested $12 million in the past three years on remodeling and renovation, and says it is eager to do more remodeling and secure additional space. Its closest competitor—Ahold's Giant—has four stores, and a spokesman says one more is under construction and others are planned.

"Our inner city stores have remained profitable because of density, a lack of competition, and the fact that we operate a good store," says TenEyck.

Safeway has found that a good store in D.C. often means the same thing as a good store in Alexandria. "We've found that consumers are really looking for fresh vegetables and the kind of variety you'd find in a suburban area," says district manager Paul Groshko. "They tell us they would like a store just like what they see when they drive into suburbia. Obviously there's a market, and we're there to help fill the needs."

Safeway typically looks for sites that are around 50,000 square feet, but it has had to remain flexible. "Land restraint restricts us more than anything," says Groshko. "In some cases we just haven't been able to get a deal for a parcel of land that will support a store that works for both our company and the community." Still, the company has managed to build mostly stand-alone stores with standard perimeter departments, such as the one described at the beginning of this story.

Some of Safeway's stores do not have parking lots—a fact that would immediately deter some retailers. "The delivery drivers probably have the hardest job!" jokes Groshko. But he quickly adds that an outstanding distribution team helps make Safeway's success possible. A few of its stores have underground parking garages.

The high volume of walk-in trade is definitely a change from suburban stores, and as a result, inner-city stores take more wear and tear. But city customers expect clean stores as much as suburban shoppers, so remodeling is perhaps even more critical in urban areas, Safeway has learned.

Several years ago, after the chain closed a few under-performing stores in the District, residents of the Petworth neighborhood began to voice concerns that its store on Georgia Avenue would be shut down. "We met with the Advisory Neighborhood Commission and then we went back and asked the community where they shopped," recalls TenEyck. "Many of them told us they were going to the supermarkets in the suburbs. So we told them if they would invest in the store, we would invest in it."

The community agreed to support the store, even promoting it among its neighbors, so Safeway shut it down and did a full remodeling, including a new floor and ceiling. When the project was completed, traffic picked up at the former money-losing store and it turned profitable.

Safeway was recently unsuccessful in its bid to build a 50,000-square-foot store in downtown Washington, but the company says it still is aggressively looking at other sites. Meanwhile, it has $13 million budgeted for remodeling and renovation in the next 18 months.

Taking on the big boys in Beantown

In the heart of Boston, Tropical Foods has served residents in Roxbury—a lower-income, ethnically diverse community—since 1974. Owner Ronn Garry joined the operation in 1981 to help his father-in-law when the business got into financial difficulty and then took over the store in 1988. Tropical Foods now brings in about $12 million a year in sales, not bad for a store with only 8,500 square feet of selling space.

Despite the lack of space, Tropical Foods' produce department features a 20-foot roots section and vegetables from around the world. "The Hispanic shoppers refer to the store as 'El Platanero,' or 'the banana man,'" says Garry.

Tropical Foods is a great example of a mid-tier store serving an ethnically diverse urban clientele, according to Boston Consulting's Blaxill. "It's unlike any store I've been in," he says. "There's a mural on the side of the building with names of different countries. When you walk in, you find a completely unique selection of produce. And they have some serious, major-league bags of rice."

The diversity of the store's staff mirrors its customer base. It has a meat manager from Puerto Rico, a dairy manager from the Dominican Republic, and a front-end manager from Congo.

Tropical fills an ethnic niche in dry grocery, clearly an area that sets the store apart, according to Garry, who says he has more freedom in buying as an independent grocer. "We're able to use what I refer to as 'gypsy vendors,'" he notes. "That may mean getting butter beans one day and not getting them the next. Because we've been here, we've been able to develop relationships and get different products. Going beyond Goya becomes fractional for the big companies' supply chains."

Garry says he's also proud of the fact that he uses many local suppliers, which helps keep business local. "We buy our chicken from Prime Poultry, a Roxbury business only a quarter of a mile away," he says.

Inner-city customers are often not looking for the same products they find in the suburbs, as Garry sees it. "People in the inner city have limited incomes. You can't charge higher pricing. We tried selling porterhouse steak once at $3.99 a pound, and nobody wanted it." The store reaches out to the community in various ways, often by getting involved in its many ethnic festivals throughout the year, Garry says. One highlight is a Caribbean carnival held every August, when Tropical sponsors various musicians that play atop a flatbed truck as dancers in colorful costumes parade the streets.

These days, however, Garry spends much of his time looking for ways to expand and build another store. "If we just want to be a bodega for the rest of our lives, we don't need to bother. We've got to compete with the big boys," he says.

That can be difficult when national chains can more easily afford high rents and can hang with under-performing stores, worries Garry. Then again, Garry and Tropical Foods have roots in Roxbury—20 feet of them, in fact—that the big guys may find hard to duplicate.